Oil prices jumped above $100 -a-barrel yesterday on reports that Iran plans to hold military maneuvers to practice the closing of the Strait of Hormuz, according to Bloomberg citing the Fars news agency, although the Iranian Foreign Ministry later denied this report sending oil prices lower.

This is a mark of how tense relations between the nations now imposing trade sanctions and Iran have become. It is not as though the ability of the Iranian navy in its home waters to block the Strait is an unknown factor. But this sort of market rumor and the price response shows a very nervous oil market.

Persian Gulf oil supplies

Around 15.5 million barrels of oil travels through these waters each day or about one sixth of global consumption, mostly heading for Europe and China. Iran is the second largest Opec oil producer after Saudi Arabia with an output of 4.25 million barrels per day.

Not all Gulf oil passes via the Strait of Hormuz. The United Arab Emirates has recently opened a pipeline bypassing this natural bottleneck to the Indian Ocean.

However, Iran would not take such a bold decision lightly for it would cut off its only source of foreign exchange, plunging the country into a very serious economic recession. This would not make its government very popular with people who are already suffering from the impact of Western sanctions on external trade.

Oil boycott?

European governments are also mulling a boycott of Iranian oil in anycase after an IAEA report that the country is working on a nuclear weapons program. At the same time the whole Persian Gulf region is in a state of heightened tension because of the departure of the US from Iraq at the end of this month.

On the other hand, with the US to leave 20,000 personnel at its embassy compound in Baghdad, by far the largest US embassy in the world, and thousands at other consulates around the country this withdrawal is mainly symbolic with most of the military machine remaining close at hand in Kuwait.

In these circumstances any real change to the status quo in the region looks highly unlikely. The Iranian military threat remains nothing in comparison to the overwhelming force it would be stacked against.